What expenses can you deduct from your business profits?

You’re replacing some of your firm’s machinery at great expense. Naturally you’ll want to maximize tax relief for this. Apart from the cost of the equipment, what other expenses can you deduct from your business’s profits?

Not all expenses are equal

When your business spends money on installation costs for equipment it won’t necessarily reduce your taxable profits. If the expense relates to structural changes to your premises it instead may count as a deduction when working out if and how much capital gain is made when the property is sold. However, the good news is that the cost of some structural work can be deductible from profits. You just need to be able to identify it.

Tip. Categorising expenses as deductible from profits usually results in tax relief much sooner. In fact, if you can’t categorise expenses that way you might get no tax relief at all, say, because you never sell your premises, or if you do you don’t make a capital gain from which the expenses can be deducted. Identifying expenses correctly is important in maximising tax deductions.

Capital allowances

As you probably know, tax deductions for equipment (known as plant and machinery (P&M) are given as capital allowances (CAs). Where you can link the cost of structural work to the installation of P&M, it will qualify for CAs and therefore also be deductible from profits rather than from capital gains.

Identifying the type of expense

The sort of expenditure you should try to link to P&M is that for the:

  • alteration of buildings required for the installation
  • removal and deconstruction of existing P&M, even if it’s not being replaced
  • moving of P&M from one site to another and reinstalling it
  • additional VAT payable resulting the VAT capital goods scheme (CGS)

Examples of building costs which can qualify are walls constructed solely to house P&M, special wall coverings such as tiles and splash-backs, and sound proofing. There’s no list of expenditure that does or doesn’t qualify for capital allowances. The scope is very wide. However, you don’t need to consider money spent on repairs and redecoration as this will normally be deductible from profit as general business expenses.

Tip 1. Make sure your bookkeeper is aware of the need to analyse bills and be well versed in the CAs rules to identify and allocate expenditure correctly in the company’s records. If expenditure is missed it could mean that you lose tax relief permanently.

Tip 2. If you’re having construction work done, some of which is to accommodate P&M, ask the builder to provide a detailed breakdown of the costs. That will make it easier for you and your bookkeeper to spot qualifying expenditure.

Tip 3. Where a single cost can’t be identified specifically as general building work (not qualifying for CAs) and work related to the installation of P&M, e.g. scaffold hire, you can apportion it in any fair way to arrive at the qualifying and non-qualifying amounts.

 

The cost of building and demolition work needed specifically so you can install machinery can be added to that for the machinery itself and capital allowances claimed for the total. Where a general cost, e.g. scaffold hire, relates to both qualifying and non-qualifying work, you can apportion it and the CAs accordingly.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

For any assistance contact Companies999, we will be happy to help you!

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